Brokers’ take: Analysts mixed on DFI Retail Group’s margin outlook after H1 results release
Zhao Yifan
A NUMBER of research houses have tweaked their target prices and earnings estimates for DFI Retail Group after the retail company, which counts 7-Eleven, Guardian and Cold Storage among its brand portfolio, swung into the black for the half year ended Jun 30.
On Monday (Jul 31), Citi Research upgraded its call to “buy” from “neutral” while increasing its target price to US$3.28 from US$3.16, as it sees DFI’s return to profit as an indication of recovery.
“The near-term recovery outlook is trending better than expected, while the transformation plan from the new management team may be able to help DFI to revitalise the South-east Asia business and build sustainable growth in the longer term,” said analyst Brian Cho.
Highlighting the health and beauty segment as the main driver of better-than-expected operating margin for H1, Cho believes DFI’s valuations are currently undemanding amid a better near-term recovery outlook.
The analyst therefore raised his core net profit estimates for the group by 16 per cent to 22 per cent for FY2023 to FY2025, to factor in improved revenue, operating margin assumptions and associate results.
Similarly, DBS Group Research expects DFI to continue picking up in the second half of 2023. It maintained its “buy” call while keeping its target price at US$3.80.
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DBS analysts said they expect the group to report a “disproportionately stronger” H2 driven by the health and beauty, convenience store and restaurant segments.
They see more growth coming from healthcare products compared to pre-Covid times, as such products now command a higher margin.
On the contrary, UOB Kay Hian (UOBKH) and CGS-CIMB are more concerned about DFI’s under-performing grocery segment and see H1’s performance as an indication that the group’s earnings may recover slower than expected.
UOBKH maintained its “buy” call on the stock while slashing its target price to US$3.49 from US$3.72, to account for lower FY2023 to FY2025 earnings estimates by up to 46 per cent.
Its analysts now expect a prolonged pace of recovery in several of DFI’s business segments.
They forecast no revenue growth for the grocery business as opposed to a previous forecast of 3 per cent growth.
They also foresee a 100 to 150 basis-point reduction in FY2023 operating profit margin for the grocery, convenience and home furnishing businesses.
UOBKH nonetheless remained optimistic on DFI’s health and beauty segment, noting that the group has opened 50 new stores in the first half of 2023 compared to a base of more than 1,200 stores. Its analysts expect more stores to open in Indonesia in the medium term.
CGS-CIMB reiterated its “hold” call but lowered its target price to US$2.90 from US$3.40, to reflect a lower price-to-earnings ratio of 15.6 times based on 2024 estimates, compared with the previous 17.2 times multiple.
Analyst Ong Khang Chuen lowered his margin assumptions to result in a 5 per cent to 27 per cent reduction in DFI’s earnings per share estimates for FY2023 to FY2025.
Although Ong is positive on the prospects of the health and beauty segment, he believes more transformational changes are required in DFI’s grocery segment in order to sustain the group’s overall recovery.
Given lower margins in the grocery retail segment versus Covid-19 levels, Ong sees significant challenges in DFI turning around its grocery business.
Ong also highlighted DFI’s associate Yonghui as a concern. The Chinese supermarket chain continued to report losses as it adjusts its product structure and store format to cater to changing customer shopping habits in China, which adds to the uncertainty over DFI’s pace of recovery.
As at 2.28 pm on Tuesday, shares of DFI were down 1.9 per cent or US$0.05 at US$2.64.
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